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Should Policy in a Monetary Union be based on Union Aggregates?

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  • Jensen, Christian

Abstract

In a standard New-Keynesian sticky-price model of monetary policymaking, we show that formulating the policy objective of a monetary union in terms of a weighted average of objectives for inflation and output in each of the member countries, instead of union-wide aggregate inflation and output, can have an important impact on the effective weight each member country carries in policymaking. This has implications for how fluctuation costs are distributed among member countries, and whether or not monetary policy contributes to harmonize inflation and output across the union.

Suggested Citation

  • Jensen, Christian, 2012. "Should Policy in a Monetary Union be based on Union Aggregates?," MPRA Paper 45641, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:45641
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    File URL: https://mpra.ub.uni-muenchen.de/45641/1/MPRA_paper_45641.pdf
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    References listed on IDEAS

    as
    1. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Benigno, Pierpaolo & Lopez-Salido, J. David, 2006. "Inflation Persistence and Optimal Monetary Policy in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 587-614, April.
    4. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    5. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
    6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monetary policy; Monetary union; Policy objectives; Harmonization;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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